Justia Tax Law Opinion Summaries

Plaintiff filed suit for wrongful levy after the IRS levied her account at a bank, which she asserts was her separate property, when her husband incurred a tax liability. The district court dismissed the suit for lack of subject matter jurisdiction. The court concluded that plaintiff, as the person who paid a tax assessed against another person, is a “taxpayer” under the Internal Revenue Code’s default definition, and nothing in the Taxpayer Assistance Order (TAO) statute, 26 U.S.C. 7811, redefines or is manifestly incompatible with that definition. Further, the court concluded that her TAO application tolled the running of the statute of limitations under the plain language of section 7811(d). Accordingly, the court reversed and remanded for further proceedings. View "Rothkamm v. United States" on Justia Law

From 2002 to 2007, Defendant-appellant Jerold Sorensen, an oral surgeon in California, concealed his income from the Internal Revenue Service (“IRS”) and underpaid his income taxes by more than $1.5 million. He used a “pure trust” scheme, peddled by Financial Fortress Associates (“FFA”), in which he deposited his dental income into these trusts without reporting all of it to the IRS as income. Over the years, he also retitled valuable assets in the trusts’ names. In 2013, after a series of proffers, the government charged him with violating 26 U.S.C. 7212(a) for corruptly endeavoring to obstruct and impede the due administration of the internal-revenue laws. A jury convicted him of the charged offense. On appeal, Sorensen argued his conduct amounted to evading taxes so it was exclusively punishable under a different statute; that the prosecution misstated evidence in its closing rebuttal argument; and (7) cumulative error. Furthermore, he argued the district court erred: (2) by refusing his offered jury instruction requiring knowledge of illegality; (3) by giving the government’s deliberate-ignorance instruction; (4) by instructing the jury that it could convict on any one means alleged in the indictment; and (5) by refusing to allow him to provide certain testimony from a witness in surrebuttal. Finding no merit to any of these contentions, the Tenth Circuit affirmed Sorensen's conviction. View "United States v. Sorensen" on Justia Law

Appellant AT&T (together with subsidiaries) appealed a Tax Court judgment that denied AT&T's claim for a refund of a portion of the Oregon corporate excise taxes it paid for tax years 1996 through 1999. The dispute centered on AT&T's sale of interstate and international phone and data transmissions. The issue this case presented on appeal to the Supreme Court was whether those sales were counted in determining the fraction of AT&T's income that Oregon can tax. AT&T presented a cost study that purported to show that Oregon did not have the greatest share of the "costs of performance." The Department of Revenue challenged AT&T's interpretation of "income-producing activity" and attacked the validity of its cost study. The Tax Court ruled in favor of the department. Upon review, the Supreme Court concluded that AT&T did not use a correct definition of "income-producing activity [:] AT&T's proposed interpretation [was] network-based; it focused on the operation of its network as a whole. The correct understanding, however, is transaction-based; it examines individual sales to customers. AT&T thus failed to meet its burden of proof, because it did not correctly calculate the 'costs of performance' for the correct 'income-producing activities.'" View "AT&T Corp. v. Dept. of Rev." on Justia Law

Appellants were three municipal corporations located in Washington State: The City of Seattle, the City of Tacoma, and Public Utility District No. 1 of Snohomish County (taxpayers). Each taxpayer owned an interest in electrical transmission capacity that was purchased from the Bonneville Power Administration (BPA) and was used for transmitting electricity over the Northwest's federally-administered power transmission grid. Together, the taxpayers appealed the grant of summary judgment in which the OregonTax Court, citing "Power Resources Cooperative v. Dept. of Rev.," (996 P2d 969 (2000)), concluded that taxpayers' interest in electrical transmission capacity could (because much of that grid was located in Oregon) be taxed by the department as a property interest "held" by taxpayers, under ORS 307.060. On appeal, taxpayers argued that: (1) "Power Resources" was wrongly decided; (2) the Oregon Supreme Court's decision in "Pacificorp Power Marketing v. Dept. of Rev.," (131 P3d 725 (2006)) did not apply in this case; and (3) the Oregon legislature's repeal of the 2005 property tax exemption benefitting out-of-state power-generating municipalities was enacted in violation of Article IV, section 18, of the Oregon Constitution, a provision that required bills for raising revenue originate in the House of Representatives. The Oregon Court rejected the taxpayers' arguments and affirmed the Oregon Tax Court. View "City of Seattle v. Dept. of Rev." on Justia Law

For more than a decade, the City of Columbia has been allocating substantial amounts of revenue generated from user fees for water and sewer services to its General Fund and for economic development purposes. Appellants filed this action contending the City's practices violated sections 6-1-330 and 6-21-440 of the South Carolina Code. The trial court granted the City summary judgment. Because there were genuine issues of material fact as to whether the City's expenditures of water and sewer revenues were lawful, the Supreme Court reversed and remanded for further proceedings to determine whether the funds transferred into the City's General Fund were properly considered "surplus revenues" under section 6-21-440 and could therefore be spent for unrelated purposes and whether the City's direct economic-development expenditures bore a sufficient nexus to its provision of water and sewer services such that they would be considered "related" expenditures under the terms of section 6-1-330(B) of the South Carolina Code. View "Azar v. City of Columbia" on Justia Law

In these appeals and cross-appeals, the taxpayers claim they are entitled to tax credits associated with foreign transactions that the government disallowed because it contends the transactions lacked economic substance. The court rejected AIGʹs contention that foreign tax credits, by their nature, are not reviewable for economic substance; in determining whether a transaction lacks economic substance, the court considered: (a) whether the taxpayer had an objectively reasonable expectation of profit, apart from tax benefits, from the transaction; and (b) whether the taxpayer had a subjective non‐tax business purpose in entering the transaction; the court concluded, as a matter of first impression in this Circuit, that foreign taxes are economic costs and should thus be deducted when calculating pre‐tax profit; the court also concluded that it is appropriate, in calculating pre‐tax profit, for a court both to include the foreign taxes paid and to exclude the foreign tax credits claimed; under the subjective prong, a court asks whether the taxpayer has a legitimate, non‐tax business purpose for entering into the transaction; as to AIGʹs transactions, the court held that there are unresolved material questions of fact regarding the objective factors and subjective business purpose for entering the cross-border transactions; as to BNYʹs transactions, the court held that the Tax Court correctly concluded that the Structured Trust Advantaged Repackaged Securities loan product (STARS) trust transaction lacked economic substance; and the court also held that the Tax Court did not err in concluding that the $1.5 billion loan from Barclays had independent economic substance, and that BNY was therefore entitled to deduct the associated interest expenses. Accordingly, the court affirmed the judgment in its entirety. View "Bank of N.Y. Mellon v. Commissioner" on Justia Law

Defendant was convicted of conspiracy to defraud the United States, in violation of 18 U.S.C. 371, and four counts of filing false individual income tax returns, in violation of 26 U.S.C. 7206(1). The court concluded that there was sufficient evidence for a reasonable jury to find that defendant was guilty of conspiracy to defraud the United States where she and her husband owned two medical schools in the Caribbean, made millions of dollars from operating and selling them, and then, instead of reporting and paying taxes on any of that money, the couple followed "a common design" to hide it in multiple offshore accounts. Further, there was sufficient evidence for a reasonable jury to convict defendant of the four counts of filing false individual income tax returns where she failed to disclose her financial interest in foreign bank accounts. Finally, the district court did not err in denying defendant's motion for a new trial, the district court properly admitted the husband's out-of-court statements, e-mails, and other correspondence under Federal Rule of Evidence 801(d)(2)(E), and the district court did not clearly err by including in the loss amount the tax she owed on the interest, dividends, and capital gains in those accounts. However, the district court should have made a foundational finding as to whether the two entities defendant owned are properly treated as partnerships for the purpose of federal tax purposes. Accordingly, the court affirmed the convictions, vacated the sentence, and remanded for further proceedings. View "United States v. Hough" on Justia Law

In 2009, Clarke submitted 2006-2008 tax returns for a trust, each claiming $900,000 in income and $900,000 in fiduciary fees; they did not identify the income’s source. Each reported $300,000 of tax paid to the IRS and requested $300,000 in refunds. Clarke identified the trust’s fiduciary as “Timothy F. Geither” (an apparent misspelling of the name of then-Treasury Secretary, Geithner), which raised a red flag. The IRS notified Clarke that the returns would not be processed. Clarke resubmitted, but did not name “Geither.” The IRS mailed Clarke three $300,000 checks. Clarke opened a bank account, deposited the checks, and, within months, spent all of the funds. In 2013 Clarke was indicted on seven counts of presenting false claims. The manager of the check cashing company where Clarke tried to cash his first check, testified that Clarke told him that he had the check because of “a trust fund because his dad had passed.” Clarke argued that the government had not proven that he knew the claim was false. The court did not include a good faith jury instruction requested by Clarke. Though barred from trial, a psychiatric report explained that Clarke believed that the U.S. is a business front designed to regulate commerce and has established bank accounts for its citizens. The Seventh Circuit affirmed Clarke’s conviction. View "United States v. Clarke" on Justia Law

In 1998, Eggersten's law office, an S corporation, established an employee stock ownership plan (ESOP), a retirement plan that primarily owns securities of the sponsoring employer. Eggertsen transferred his ownership to the ESOP. S corporations pass their income through to shareholders who pay any tax due on that income. 26 U.S.C. 1366, and, in the mid-1990s, it was possible for ESOPs, then exempt from taxes at the plan level, to own shares in S corporations, 26 U.S.C. 501(a), 512(e)(3), 1361(b)(1)(B), 1361(c)(6)(B). ESOP participants, such as Eggertsen, were not taxed on income attributable to stock held in the ESOP until that stock was distributed, typically at retirement. The law office, therefore, did not pay tax on its income; the ESOP would not owe tax at the plan level. Eggertsen, who ultimately owned the shares, would not owe tax on the income until retirement. In 2001, Congress amended the provisions, giving affected taxpayers a grace period to come into compliance. The law firm did not comply within the grace period. The IRS waited until 2011 to try to collect the excise tax (over $200,000) that resulted from delayed compliance. The Sixth Circuit upheld the imposition of the tax and held that the limitations period remained open. View "Law Office of John H Eggertsen, P.C. v. Comm'r of Internal Revenue" on Justia Law

The City of Birmingham sued "Bonedaddy's of Lee Branch" for failing to pay its business-license taxes, occupational taxes, interest, penalties and fees for multiple years since the business' formation in 2007. The City alleged that the defendants had failed and refused to submit business records and tax returns for the periods that were the subject of the complaint; that the defendants were currently engaged in business in the City of Birmingham in violation of the City's business-license code; and that notice of the final tax assessments had been mailed but that no payments had been forthcoming. The City asked the trial court to enter a preliminary injunction directing the defendants to refrain from further conducting business within the City and causing the sheriff to padlock the defendants' place of business in the City. The trial court ultimately granted the City's request, and Bonedaddy's was prohibited from further business until its back-taxes were paid. Cowan and Bonedaddy's argued on appeal that the trial court did not have subject-matter jurisdiction to enter a final judgment against defendant John Cowan in this case because, they say, the City did not comply with certain provisions of the Alabama Taxpayers' Bill of Rights and Uniform Revenue Procedures Act. Upon review, the Supreme Court found that the City had issued a final sales-tax assessment against Bonedaddy's. The notice of final assessment, however, did not name Cowan individually as the taxpayer nor was the notice mailed to Cowan. Additionally, the City did not present any evidence at trial to indicate that it had ever issued a final sales-tax assessment against Cowan per se. Based on the evidence presented at trial, it did not appear that the City complied with the requirements of the TBOR with regard to Cowan. The Court reversed the trial court with respect to Cowan's responsibility to pay Bonedaddy's outstanding sale taxes, but affirmed with regard to the tax assessments against Bonedaddy's itself. View "Bonedaddy's of Lee Branch, LLC v. City of Birmingham" on Justia Law